The current silver price is US$22 per ounce. This is a truly astonishing number for a few reasons.
To begin, let’s take a quick look at the history books. In 1980 an ounce of silver reached a high of $49.95. So despite all the money printing and financial chaos in the world in the past 33 years, silver has gone backwards. This is truly shocking. But when put into context it becomes even more ridiculous: If you went to fill up your car in the US in 1980, an ounce of silver could buy 180 litres of fuel. Fast forward 33 years and the same ounce would buy you just 26 litres of fuel.
The supply and demand of a $22 silver price
Unlike gold, silver has many industrial and medical applications. So investors are in direct competition with big industrial companies. In many cases there are no substitutes – if they don’t have silver they can’t produce.
Industry needs it because it’s one of the best conductors of electricity, it’s the second best reflector of light behind rhodium (but at a fraction of the cost) and it’s very effective in killing germs. So demand is exploding in electronics, solar panels and numerous medical applications. Photography used to account for nearly 33% of non-investment demand. That has virtually disappeared because of digital photography, but this void has been filled by new applications.
Back in 1980 when silver was $49.95 total supply had risen 34% in the previous two years. Supply was growing quickly. By contrast, the global silver supply has actually fallen 2% in the past three years.
A large proportion of the silver supply is a by-product of base metal production. In fact there are surprisingly few ‘pure play’ silver mines in the world. We all know the world’s in a precarious economic position. So a downturn in demand for base metals could well be on the cards, which would in turn hit silver production.
Even JP Morgan is long silver
JP Morgan is infamous among silver investors for its big short positions. It was even sued for manipulating the silver market, but the lawsuit failed.
Nevertheless, it’s always interesting to see what it’s up to in this market… if you’re heading in a different direction to it you probably need to take yourself aside and have a quiet word.
According to an article appearing on Market Oracle, JPMorgan had virtually no silver in its warehouse in May 2011. But now, the bank has accumulated about 37.7 million ounces of silver which in today’s market is worth about $830m. Across the market as a whole, short positions stood at nearly 260 million ounces of silver in February of this year. Now, according to Sprott, short positions have fallen to less than 20 million ounces. This is the smallest short position by commercial traders in more than a decade.
For gold bullion prices to rise by 100%, gold would need to rise to $2,620 an ounce. Although I feel this is very achievable, it’s a price level we have yet to see. But the investible silver market is truly tiny because of all that industrial demand. In dollar terms, it’s only 4.5% of the size of the gold market.
So for silver prices to rise 100%, they would only have to move to $44 an ounce—a price level we already saw in 2011. And that’s exactly where I believe we are heading.
• A version of this article was published in Metals and Miners on 7 October 2013